Kingfisher Property - Financing solutions for property

SPLASH Newsletter - October 2016

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Post Brexit

Commercial Property Lending


After a post 2008 high for loan origination of £53.7 billion in 2015, up from £45.2 billion in 2014, it is unclear what lending volume is likely in 2016. For a short period following the Brexit vote, there was a decline in lending activity for larger transactions but this did not last long and lenders are now busy across all loan sizes. The commercial property lending market has largely recovered from the 2008 Great Recession and on two counts at least, the quality of the overall loan book has improved.  
  • Just 7% or £12.1 billion of loans are reported to be in distress out of a total of £168.4 billion.

  • Since 2008, maximum LTV’s for new business have stubbornly refused to increase above 67% LTV and during the last 6 months of 2015, LTV’s reduced to circa 65% across the board.
We do not foresee LTV’s rising in the near future. The imposition of new regulatory rules and lack of demand amongst borrowers have both had a major impact on preventing higher LTV’s. The falls in value after 2008 when high LTV loans magnified losses have made borrowers more cautious. Except for the new regulatory rules and reduced borrower demand, low interest rates would otherwise have led to more risk taking by both lenders and borrowers, respectively to increase loan book size and make limited equity go further.
 
As regards margins for investment loans, if anything they have risen, taking advantage of falls in cost of funds so that the overall cost of finance has not increased. Margins for loans of up to £10 million and around 50% LTV are 2-2.5% and up to 50 bps more at the higher LTV end and for small loan sizes. Above £20 million loan sizes, margins start reducing.
 
Generally there are plenty of lenders seeking to write new investment loan business and competition between them is increasing. There is a big role for intermediaries in sourcing the best terms and finding lenders for less straight forward lending opportunities. As ever we represent access to new lender relationships for those borrowers who are looking for new sources with competitive pricing.
 
One surprise from the 2015 De Montfort University survey was the fall in volume of commercial development loans from £2.4 billion to £2.25 billion. This amounted to just 4% of new loan origination. UK banks and building societies dominate the small sub £10 million loan market and are the major providers of development finance at this level. Their share of loan origination fell from 39% to 34% in 2014-15. Only a couple of other international bank lenders are active and non-bank lenders accounted for just £300 million of new commercial development loans. A major reason for lack of appetite is the regulatory environment which discriminates against development on account of the additional risks involved. It is clear that the unfriendly regulatory treatment of development is not going to change, meaning that the provision of more commercial development debt will require a market-led solution. The returns available in terms of fees and margin will need to rise to a sufficiently attractive level to tempt more lenders in.
 
Despite the uncertainty and difficult market conditions, Kingfisher Property has sourced finance for substantial office developments in Leeds and Bristol as well as office refurbishments in the south east during the last few months. These have all been speculative projects without pre-lets.
 

Speculative Office Development
Bristol

This is a speculative 8 storey office development in an established prime office area to provide approximately 90,000 sq ft. The loan raised was for £14 million, without the need for any pre-lets or pre-sales. The margin is sub 3.25%.

 

Speculative Office Re-furbishment
Woking

Acting for a fund, we have arranged finance for a back to shell refurbishment of an office led mixed use development of some 58,662 sq ft opposite Woking railway station’s main entrance. The senior debt facility of £7.30 million represents approximately 35% loan to cost.
 

Mixed Use Portfolio
UK

Portfolios have proved popular with lenders due to the spread of risk. We raised £7.10 million for a portfolio of nine retail and residential properties in Central London, Richmond and Wembley on an interest only basis at a loan to value of 65%. The income to interest cover was close to 1.2 and the lender relied on the strength and track record of the borrower as well as the prime location of the Central London properties in order to justify 65% LTV given the relatively low income level.
 

Residential Development
Warwick

This comprised 17 residential units totalling some 35,931 sq ft with a completed value of approximately £17.50 million including a terrace of 10 Georgian townhouses. Kingfisher Property raised development finance of over £8.0 million at 65% loan to cost.

 

Sharia Finance
 

We have been sourcing Sharia finance which continues to be of interest to Middle Eastern borrowers and are currently arranging such finance for a PRS portfolio.

 

Post Brexit

Regulatory landscape


It’s still early days and the full impact of the UK’s decision to leave the European Union has yet to be felt in the commercial property markets. However our regulatory services for property funds and joint ventures remain in demand, in particular where the FCA’s rules require the appointment of an authorised operator to oversee the administration of on-shore limited partnerships.
 
The operator’s key function is to ensure investors’ cash and assets are properly safeguarded, and involves conducting anti money laundering checks, overseeing fund bank accounts, dealing with drawdowns and distributions of monies and maintaining the financial records necessary to satisfy the rules. Over the last 12 months we have accepted new appointments for 14 new limited partnerships, taking our total funds under management to more than £15 billion. In doing so we have noticed a marked shift towards funds targeting alternative property sectors such as PRS and student accommodation, mirroring the wider market where transactional volumes have dipped in the core commercial property markets.
 
In addition, we act as managing trustee of a total of 13 unauthorised unit trusts. Most of these are feeder funds established to allow pension funds to invest alongside other partners in limited partnerships where the underlying activity is trading (as opposed to investing). The feeder unit trust structure can shield tax exempt funds from receiving trading income.
 
Meanwhile it’s business as usual for funds falling within the scope of the EC’s Alternative Investment Fund Managers Directive (AIFMD), at least for the time being. Fund managers must still be authorised by the FCA to manage real estate funds that are not exempt and, where certain thresholds are exceeded, must also appoint an authorised depositary to safeguard the fund’s assets, monitor cash flows and oversee the manager’s activities. The referendum vote implies AIFMD will no longer apply to UK fund managers once the Brexit process has concluded (ie. 2 years after Article 50 is invoked). However the consensus is that it is in the interests of UK fund managers (who are likely to be considered non-EEA managers at that point) for the FCA to maintain the regulatory status quo thereafter, such that the UK is deemed an ‘AIFMD equivalent’ jurisdiction, enabling managers to continue benefiting from the all-important marketing passport.
 
Kingfisher Property continues to offer third party AIFMD services to its clients and is appointed manager (AIFM) of three real estate funds and private equity depositary of another, with a number of additional appointments in the pipeline.
 
Across all of our regulatory activities, our focus remains the UK real estate fund industry and on providing compliant services with the minimum level of intrusion, tailoring our activities to interact efficiently with the fund manager’s own systems and processes, not vice versa.
 

Kingfisher Property Partnerships Limited
Kingfisher Property Trustees Limited
Both Authorised and Regulated by the Financial Conduct Authority

 The team

The information contained in this communication is intended to provide Kingfisher Property’s clients and contacts with a brief update in relation to the topics covered. The information and opinions expressed in this communication do not purport to be definitive or comprehensive and are not intended to provide professional advice.

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